It is implicitly accepted by nearly every salesperson that there’s going to be a period between the moment they’re credited for a sale and the moment they receive the payment as a reward for that sales effort. All sales compensation is deferred, it just depends on for how long. It’s an industry convention that has been around since anyone can remember, an unsaid assumption internalised by salespeople and companies alike.
The many stakeholders involved in the sales compensation process have different approaches and motivations for their preferred deferral duration. A sales leader may want to motivate their team with commission payouts that come as soon as possible while a finance leader wants to manage company cash flows to optimise their working capital. Not only are there natural political tensions between the goals of different departments but there’s also tension with the underlying convention around variable compensation.
Sales leaders are often particularly strong advocates of paying out compensation out soon as possible to keep their sales teams motivated. Connecting sales efforts with sales rewards is a crucial aspect of keeping salespeople motivated. Commission payouts, even those paid out “as soon as possible”, will never be instant. So, how do you find the balance that keeps your sales team motivated and keep other departments happy? Let’s find out.
Deferred sales compensation is the practice of paying a commission on a recognised sale after the initial booking has been made. However, all sales compensation is deferred to some extent. Practically speaking, deferred sales compensation is about defining the triggers and/or deferral durations that initiate the commission payout for booked deals.
Many triggers can be used to release commission payouts depending on your industry, sales cycle length, and sales process. This specificity can also apply to individual business units within the same company that are each focused on different territories or industries.
The rationale for these triggers has powerful drivers outside of the wants and needs of any one department. For example, you could find yourself in a situation that many SaaS companies were in. A highly competitive job market and short sales cycle meant that paying out commission quarterly (if not monthly) was pretty much mandatory. If they didn’t, the sales team would quickly get demotivated and look for another job that does (of which there were plenty of options).
On the other hand, the engineering or construction sectors involve massive projects in terms of cost and scope. These deals also take a long time to close and get invoices paid. Naturally, companies here aren’t going to be able to pay out commissions frequently.
Practically speaking, deferred sales compensation is about defining the triggers and/or deferral durations that initiate the commission payout for booked deals.
The major challenge facing those managing sales compensation is enshrining the implicit agreement around deferred compensation, explicitly. To do this, you need to align the whole organisation (including the sales team) on the deferral triggers and delays while keeping the majority of stakeholders happy.
Different teams and people can have different motivations for how and why they want sales compensation to be deferred. For example, a head of sales may need to approve the demos completed by their account executives before the company pays out commissions. What demos are “approved” will be based on the demo account’s alignment with the company’s ideal customer profile, the potential deal size, and other factors. But these criteria need to be defined along with the approval timeframe beforehand to keep the process transparent and efficient.
If we look at this from a finance perspective, a longer deferred approach to sales compensation sounds pretty cut and dry. We don’t pay commissions until we get to a point in the process where the customer’s payment has already arrived (or we’re confident it will be coming).
Regardless of the outcome, it’s the sales team who is going to be the most affected. Organisations want to reward the right sales efforts in a timely manner. In sales’ ideal world, they get their commission instantly after booking a deal (or qualifying a lead, in the case of a BDR). Instant recognition and payout help them connect the reward with their hard work, motivating them to chase it again and again.
Soon enough, that will be technically possible. However, such an approach challenges the long-held convention around deferring commission payouts. In 60% of companies, account executives' commissions are paid out by trigger that happens after a deal is closed (like on payment). It’s this tension that makes it unlikely for the majority of companies to make that step in the near term.
This is the challenge of deferred sales compensation. Organisations need to keep sales motivation high while aligning deferral triggers with the overall business strategy and financial standing. To do so, you need to convince the various departments, agree on the triggers, and coordinate the implementation. Since there are always tradeoffs (as illustrated below), this is rarely straightforward.
Each team is after different things. While it’s assumed they’ll need to wait to receive the payout, the sales team wants to see the reward for their accomplishment (important note: see their reward not necessarily receive it). Conversely, the rest of the business usually prefers to pay out commissions when they’ve received the payment (or are confident enough that they will receive it soon).
You can address both these priorities by breaking down the deferred sales compensation process into two components: visibility and payment.
In a salesperson’s ideal world, they’d get their commission for booked deals almost instantly. However, as we mentioned, there’s an implicit understanding that there will always be some kind of delay.
That said, as technology evolves, the tolerance for long deferral periods is getting smaller and smaller, particularly if there’s no visibility on the earned commissions until they get their paycheque. There is a middle ground. While commission payouts can be deferred, visibility on sales rewards can’t.
What salespeople want is to instantly see that they’ve closed a deal, how much commission they’ve earned from it, and when it’ll be paid out. It’s the visibility of the achievement that connects their effort with their sales reward. This is the actual driver of a sales team’s motivation.
This is critical to making deferred sales compensation succeed with your sales team. The commission can be deferred, but recognition of each deal needs to be made visible quickly for motivation to stay high. For deferred sales compensation to work, you need to implement a system (which can or cannot include an incentive compensation management solution) that gives your sales team full visibility of their closed deals, targets, quota achievement, and commission payouts.
It’s the visibility of the achievement that connects their effort with their sales reward. This is the actual driver of a sales team’s motivation.
If you’ve done a good job tackling the visibility challenge, you’ll be able to implement a deferred sales compensation payout plan that keeps the many stakeholders happy. For example, your finance team will have the opportunity to put in place a deferred sales compensation payout plan that aligns with the financial position of the company.
So, how should it work?
Let’s use an example to illustrate the process:
Finding a middle ground when it comes to deferred sales compensation is fraught with potential pitfalls. But, as you saw above, you can find balance. When you do, you should expect:
If you give your sales team visibility and recognition of their booked deals or generated leads instantly (or at least quickly), you’ll make a clear connection between their sales effort and their sales reward. That connection is a major driver of motivation and job satisfaction. If they know they’re recognised and rewarded for their effort, they're going to keep chasing deals.
On the financial side, the organisation will have the opportunity to set the commission payout trigger that aligns with its current financial position, sales cycle duration, and invoicing and sales processes. Of course, this can be fluid.
In high growth periods, finance may be happy to pay out commissions when the invoice is sent to incentivise as many deals as possible. In downtimes, they may prefer to pay out on customer payment to retain cash that will help the company weather the storm.
When setting up their deferred sales compensation plan, many will find that the tools they put in place provide them with the opportunity to streamline and automate their sales, sales compensation, and finance processes. This can lead to a reduction in manual work, freeing up multiple people on the sales, operations, and finance teams to spend more time on strategic, value-added initiatives.
Many will find that the tools they put in place provide them with the opportunity to streamline and automate their sales, sales compensation, and finance processes.
Deferred compensation depends on balancing the needs of multiple business stakeholders, long-standing conventions, industry constraints, and the tension between timeliness and reward. Finding the right mix that keeps your sales team motivated and is in-sync with your business strategy is a delicate exercise.
The key is to make the implicit agreement on deferred compensation explicit through payout triggers that align with your company’s needs. Regardless of the payout triggers and sales cycle, ensuring visibility and transparency for your sales team is crucial to keeping motivation high. With this approach, the sales team gets visibility on their achievements which let them connect their sales efforts with their sales rewards.
Accomplishing this isn’t easy, but it’s well worth the effort. You need to first align the organisation’s different stakeholders on the payout triggers and deferral periods. Then, integrate your CRM and financial tools with your sales compensation solution (and if your compensation tool can’t manage it, look for one that can) to centralise the data and automate the processes. Your sales compensation platform should give your sales team transparent access to real-time performance dashboards that provide the visibility they need to make the connection between their sales efforts and rewards.
In the end, you can get the best of both worlds: a highly motivated sales team, an organisation able to better manage sales expenses, and an overall more efficient, transparent sales compensation process.
